It is common knowledge that paying extra towards your mortgage could help you pay it off years sooner, saving you thousands in interest payments. Despite economic woes, many people can still afford to pay extra towards their mortgage payment. However, the question should I prioritize paying extra towards my mortgage just because I can afford to?
The quick answer: it depends.
Take a look at all of your debts, even the small ones. Maybe you only owe a few thousand on a credit card and have half of your car paid off. Although you may have only a few debts, you should consider paying them off before they grow in size. Prioritize paying off your debts by the interest rate, targeting the debt with the highest amount of interest rate first.
Unless your mortgage is over 5 years old, your mortgage is likely to have a lower interest rate than most of your other debts. It is almost unheard of to have a credit card with an interest rate lower than your mortgage. Focus on paying off your credit cards, car loan and student loans before addressing your mortgage.
Although your overall debt load may be manageable now, it doesn’t mean it always will be. Many people end up in foreclosure or seeking bankruptcy because they were not prepared for unexpected expenses. Getting laid off and suffering from a costly medical condition can quickly soak up income and leave you with an overwhelming debt burden. Before you shovel all of your extra cash into paying off your mortgage, be sure you have saved for emergencies. A good rule of thumb is to have enough money saved to cover 4-6 months of expenses. Once you have an emergency fund and paid off other high interest debts, attacking your mortgage with extra payments can put you debt free and living without worry.